Family Office Interviews

 “In between, you have other services that the principal, but more importantly, the next generation, will start to look at. That spectrum ends-up splitting the family office space into investment offices for families, or more comprehensive services – fully fledged Family Offices for the families,” he says.

Getting to crunch point

“For some families it’s just easier to lean on the people that they’ve worked with and trust in the operating business: ‘While you’re doing all this work for the company, can you also do this work for my investments’, for example. That’s very typical. To be honest, I’m a good example. I originally worked for the family business,” Bilal confesses. “But it’s important to understand early on, that you have to have proper boundaries,” he stresses.

“It’s very easy to get blurred in terms of the conflict of interests. So, if I’m a lawyer for the business and the principal asks me to look at their personal assets, sometimes those assets may be used for the business and there might be a conflict. Am I looking out for the best interests of the company, or the best interests of the family when it comes to those assets? In the same way, if we’re looking at the financial returns, would the investment assets for the family, or the business come first?” he illustrates.

According to Bilal, the majority of wealthy families will have similar types of investments. “Real estate, financial assets and private equity, for example, can all be embedded in the family business, but it will be biased towards what the business understands and is good at. That might be a good thing to focus on, but it has to be done by design and not default,” he cautions.

“When you start moving out of the embedded family office you open up to other assets that are available for the family to look at and to invest in,” he explains. “That requires slightly different skill sets and a different focus. The CFO in the operating business is unlikely to be a skilled investment manager and may not have the requisite investment experience or expertise.” Bilal adds.

But the critical factor to understanding what type of family office structure to have, is to understand who the office would serve. This question becomes all the more important once the family grows to include multiple generations.

Understand what the family wants and needs.

“There’s no right or wrong about it, it’s just about design and obtaining the best outcome from that design for the family in question,” says Bilal. “Sometimes families decide that they want to stay in the family business, to focus on what they know best and concentrate their efforts and capacity to invest in building or expanding the family business. Other families decide they want to serve the members of the family who are not in management, to diversify and offer other services,” he explains.

Stand-alone Investment or Family Office?

“Typically, once the principal decides they want to look at investments to diversify for the family, they may choose to focus on just one or two asset classes. I’ve seen a lot of such offices,” says Bilal. “They become expert in that particular asset and it becomes an investment office for the family more than an embedded family office. For example, some will focus on real estate, whereas another family might concentrate on logistics. Effectively, it is a stand-alone asset manager for the family,” he explains. “But, that is only achievable if there is enough scale,” he adds.

The basic and most common example is with financial assets, according to Bilal. “It’s the easiest because the providers offer support, whether a private banker, a financial institution or a multi-family office, and they are the easiest to benchmark,” he says. “If the range of the assets under management goes from a few million pounds to one hundred or two hundred million pounds, it could be done through the private banks or asset managers. The lower the level of asset – under two hundred million pounds, say, the more difficult it would be to do it in-house,” he cautions. “It would cost more and there would be less incentive for a manager to run your portfolio.

“The attraction for talent is based on reward – that’s the challenge,” says Bilal.

“Families can save on private banker or investment institution charges by doing it in-house, but then they would incur the cost of running the office and run the risk of having the bias of one manager, who could at some stage decide to leave – you have to keep that in mind as well: the succession,” he adds.

“I’ve been serving one family for twenty-plus years, but I’m not going to be around forever, so you need to think about that.”

Another aspect to consider is investment advice from within family itself. “Some families will have among their members, perhaps from the next generation or an in-law, someone who’s financially driven and has the relevant skill set,” suggests Bilal. “That might dictate the family putting the investment in-house. That comes with some risk of bias, whether conscious or unconscious, through the nature of the family relationship, and not to forget the major risk of members of the family deciding to separate from the family or divorce.” he adds.

However, it’s not only financial assets. “There’s also real estate, or venture capital, for example. A member of the family might take that on and become the asset manager. The totality of the asset allocation and the investment policy would be skewed towards the skills, or driven by the preferences of the family members. That’s something that I’ve seen a lot,” says Bilal.

A Family Office involves additional services

“As the family grows you may find you have members, or the next generation, who are not involved in the business or the investments and the question arises: what are you going to do for the rest of the family?” asks Bilal. “This is when the family has to make a decision – does it continue being a family, staying together and putting all its assets and services under one umbrella, and preferably professionalising that approach; or split and everyone goes their own way?”

According to Bilal, if the family decides to stay together, it has to ask questions such as, who is family and how do you treat the different generations, in-laws etc. “The first step is designing what the family wants, step two would look at how to deliver that to keep the family together, and then step three would go into the services required from a Family Office, or to look at outsourcing – they might decide they don’t need a family office,” Bilal suggests.

Services could include managing the financial assets, legal, tax accounting, compliance, structuring, security, lifestyle services, family education, reporting, succession planning and family governance.

Ultimately, the Family Office needs to have a strategy, a clear understanding of what the office will be delivering, to whom, and in what format, and then to have a proper business plan to share with the family.

“Like everything in life, those are not static,” he continues. “Once you have the design, you have to keep on reviewing the services or the structures that you have put in place for the family, because things change in the family – you have new generations, you have different members of the family moving to different jurisdictions and not to forget the change in the environment (tax, political, social),” Bilal explains.

However, it’s not all about wealth planning. For some families the excitement comes not from the investments but from philanthropy.

“The Family Office can keep on top of the execution for the family and be their tool,” says Bilal. “The family will agree the themes that they’d like to support and who would be doing what, and the role of the Family Office would be either to execute the plan, or at least to give support to the family, and manage the reporting.” Bilal stresses that linking the non-financial aspects with the financial aspects is one of the most important elements of the reporting. He says: “The family needs to understand, if it has the means and the tools to deliver the best support.”

“Technology is moving very fast in this space,” explains Bilal. “Some twenty years ago, very few providers offered technology to support the Family Office. Excel and PowerPoint were, and to some extent still are, the main tools.”

“The interface with the family is important – most of families now require reports on their hand-held devices, not even on their laptops. There are plenty providers and each provider meets the needs of the families, more or less, so sometimes you have to complement with another provider.

“The challenge for families is to design what they want first and how they want it to be delivered. Then the Family Office would look at the providers and do the proper due diligence to understand which provider will give the best solution for that family. Some providers are at the early days of developing a product, or they are not suitable for the family such as, tax modules,” Bilal warns.

“At the moment tax is a specialist tool. Most families include different generations and different jurisdictions and for that you have to have specialist tax input,” he says. “Having one tool that includes tax as well as asset reporting, lifestyle reporting, reporting on collections, and on all of the family’s assets, becomes a little bit challenging. There are tools that claim to do it, but you have to do the due diligence and understand whether those tools will cover the requirements, especially if you have a complex family,” Bilal says. “Moving to the cloud has made the challenges formerly experienced with servers and server locations a little bit easier, but from a tax perspective it’s still not very clear,” he adds.

Adopting new technology is difficult

“It’s a proper project that needs to be carried out by a team,” says Bilal. “The Family Office would be a good place to start from, at least to understand the needs and to pull in the resources as needed to do the project. It’s lengthy and costly, but there are rewards at the end, but there are costs first!” he warns.